Cheese Price Makes a New High, But for How Long?

Jul 12, 2010

By Robin Schmahl, AgDairy LLC

The anticipated tightening milk supply has yet to take place. Late last year, the proverbial ax was to fall on a number of dairy operations as many banks needed to be rid of bad loans. This would result in lower cow numbers, thereby tightening milk supply.

However, improving milk prices at the end of the year and better futures prices for 2010 kept banks from pulling the plug. They were waiting for better milk prices in order to achieve a better return for liquidated assets. Milk prices have improved but not to the desired extent. Soon banks will be pulling the plug on farms with deep financial trouble as they just are not willing to carry them much longer. This should decrease cow numbers and eventually tighten milk supply.

Higher milk prices and a better outlook earlier this year resulted in farmers pushing milk production as much as possible, resulting in improving milk per cow and increasing milk production. This has tempered milk prices, with the first half of the year posting an average Class III price of $13.68/cwt.

This price leaves much to be desired, causing Cooperatives Working Together (CWT) to step up and remove more cows. Initially, CWT was vague as to the number of cows and amount of milk production it was going to remove. Last week, it announced that 194 bids were accepted, representing 34, 442 cows and 653.9 million pounds of milk. This announcement by the CWT did not affect the market in any way.

The first few times a herd retirement round was implemented, prices on the futures market jumped in response. However, when little effect was realized from the removal of cows, futures moved back in line with the underlying cash markets. Now, traders do not even take a CWT herd retirement announcement into consideration but focus on the underlying fundamentals.

For the first five months of this year, farmers added 21,000 cows to the nation’s herd, stopping the steep drop in cow numbers last year. In essence, the result of the latest CWT herd retirement program will be 13, 442 cows less than the end of last year. This is not enough to turn the market. This number will likely be absorbed in coming months as heifers enter the milking herd.

USDA increased its estimate for milk production both for this year and next year on their latest World Agricultural Supply and Demand report released last week. Milk production this year is now estimated to reach 191.2 billion pounds, an increase of 1.9 billion pounds from 2009 and up 800 million pounds from the June estimate.

Total milk production for 2011 is now expected to achieve 193.5 billion pounds, up 500 million pounds from last month’s estimate. USDA certainly does not think forced liquidation, CWT or low milk prices are going to slow milk production like it did in 2009 when total milk production fell below 2008. Keep in mind these are just estimates and much can and will change before it is all said and done.

Cheese prices last week soared higher with blocks making a new high for the year at $1.52 3/4 and the highest price since Dec. 24, 2009. It was anticipated traders would buy Class III futures more aggressively once the $1.51 level was breached, but this was not the case. Actually, many contracts traded lower as cheese price moved above $1.51.

Current fundamentals do not suggest continued higher prices, and this keeps traders very cautious. The pattern has been that futures began declining about a week before cash cheese declined as traders anticipated a retracement in price. We know this pattern will not be maintained forever, but indications are that it may continue through the rest of this year. With the trade being accustomed to this pattern, futures prices have been void of significant volatility and not allowing later months to add large price premiums. This makes it difficult to hedge attractive milk prices unless option strategies are implemented.

Upcoming reports:

-Fluid milk sales on July 16

-June Milk Production report on July 19

-June Cold Storage report on July 22

-August advanced Class I price on July 23

-June Livestock Slaughter report on July 23

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.

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Northeast Texas7/13/2010 03:26 AM

Several large dairies in this county have been carried by lending institutions. We who have been cutting everything to survive are ready for these large dairies to go out of business in hopes that it will decrease cow numbers and tighten milk supply.
I have heard that several huge dairies with thousands of cows in New Mexico and West Texas are also in trouble with their 3-4 banks. These dairies usually have no less than 2000 cows.

Anonymous7/12/2010 03:09 PM

We lost several cows on our farm in the midwest last week. Cows calving in the heat, esp with twins, have a tough time of it.

SE PA7/13/2010 02:26 AM

We are down 12+ lbs of milk and BF has dropped from 3.8 to 3.5 with hot dry conditions last 3+ wks. This is a ties stall herd with evap cooling pads so we are better than many with heat stress. Yesterday front came through with cool off and blessed rain. Corn is now looking like corn instead of pineapple.